Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

NFA's Code of Arbitration and Member Arbitration Rules (collectively referred to as "Arbitration Rules") authorize NFA to suspend any Member or Associate that fails to pay an arbitration award. NFA cannot normally suspend while a motion to vacate is pending in court, however. In some instances, Members and Associates file these motions solely to delay payment and then go out of business while the motion is pending, often making the award uncollectible. The amendments to the Arbitration Rules will require Members and Associates to post a bond in order to avoid suspension while a motion to vacate is pending.

The immediate impetus for this proposal is a recent case involving several South Florida firms and individuals. After an unsuccessful attempt to get the arbitrators to modify the award, the Respondents filed a motion to vacate in a Florida state court. When the judge denied the motion, the Respondents filed a motion for reconsideration. They also threatened to file an appeal if the judge denied the motion for reconsideration. These proceedings delayed the customer's efforts to collect the award by more than seven months. Since all but one of the Respondents are now out of the industry and the remaining Respondent is the subject of a BCC action, the award may be uncollectible.1

Motions to vacate are rare. Although NFA arbitrators have issued more than 1,500 awards since the program began in 1983, we are aware of less than 50 motions to vacate NFA arbitration awards. More importantly, we know of only two that have been granted.

While NFA does not want to prevent Members from filing legitimate motions to vacate, we do want to eliminate any incentives to file those motions for the sole purpose of delay, especially when the award may become uncollectible in the meantime. Therefore, the amendments will require a Member or Associate to file a bond if it does not want to face suspension while the motion is pending.

The Board believes the bond should be high enough to cover the amount of the award plus interest and costs, including any attorneys' fees granted by a court for filing a frivolous motion to vacate.2 The bond is set at 150% of the award. NFA staff will have the authority to accept a smaller bond in appropriate circumstances (e.g., a multi-million dollar award, where attorneys' fees would be a smaller percent of the award), but will not have authority to waive the NFA bond or to set it at less than 110% unless the Member or Associate has posted a bond with the court.3

NFA respectfully requests that the Commission review and approve the proposed amendments to Sections 10(g) of NFA's Code of Arbitration and Arbitration Rules.


1 NFA eventually suspended the Respondent's associate membership because Florida law requires a bond or a court order to stay enforcement during an appeal to a higher court, and the Respondent did not comply with that provision. This requirement only applies to an appeal from a lower court decision, however, not to the initial filing of a motion to vacate. Furthermore, NFA should not have to rely on the laws of 50 different states to determine whether and when a bond is required.

2 The 11th Circuit recently warned parties who lose in arbitration that it will consider imposing sanctions (e.g., attorneys' fees) for filing and appealing frivolous motions to vacate. See B.L. Harbert International, LLC v. Hercules Steel Co., No. 04-03255-CV-HS-S (11th Cir., February 28, 2006).

3 Staff will, of course, adopt internal procedures for administering the bond requirements. These procedures will include the types of bonds NFA will accept (e.g., cash, cash equivalents, bonds from state-licensed bonding companies) and how the funds will be distributed once the motion to vacate is decided and all appeals are concluded.

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